Fear Index Can’t Even Get a Driver’s License

Vaunted VIX limps through churning market, expiration

So I spent a few days at Disney World … and away from the trading turrets. And somehow, the CBOE Volatility Index (CBOE: VIX) survived. Barely. The market churned to nowhere and and the VIX drifted to a level where it now can’t even get a driver’s license.

I know I know, they “rolled” VIX. Since VIX does not factor in options with under eight days remaining, they necessarily must eliminate near-month S&P Index Options (CBOE: SPX) options from the mix at some point, and then replace them with another cycle. This can cause a blip in VIX, but not a radical repricing.

But more importantly, nothing has actually changed. Many options trading investors treat VIX as some sort of independent amorphous being, but it simply indexes implied volatility on SPX options. Its the tail of the dog. Let’s say on a given day, SPX April options, May options and June options all close unchanged in implied volatility terms. Any rational person would argue that implied volatility did not move. But suppose its a “roll” day, and suppose April options trade at a higher volatility than May options. And they take April out of the calculation, and now May carries a larger weight in the formula. VIX will decline, even though actual implied volatility didn’t budge.

VIX was correct before the roll, and it’s correct after the roll, but yet it moved down $1 this week on the roll and more or less sat at the new, lower level.

Which leads to another subject. Be careful of charting VIX too finely. If a stock moves from 17 to 16, it very well might bust through moving averages and other key chart points. In other words, if you believe in charting to begin with, it carries some meaning. VIX moving from 17 to 16 might have meaning too. Or it might just be simple function of math, not all that much different from Friday, holiday and news related quirks.